Constituent parts of a contractual agreement

A contract is an agreement which is enforced by law and affects the legal rights or duties of the parties involved. In this scenario, the contracts made between Kelly, interested in installing a new IT system in her workplace, and Hamilton, a Managing Director of PCTech Ltd will be analysed.

The existence of a contractual agreement forms basis on a number of essential elements. An offer followed by unconditional acceptance, consideration, intention to be legally bound, capacity, legality, freedom from undue influence, and consent.

These constituent parts of a contractual agreement have been assessed within various different approaches. Lord Denning favored a liberal laissez-faire approach and in Butler Machine Tool Co. Ltd v Ex-Cell-O Corporation (England) Ltd [1] , he stated:

In many cases our traditional analysis of offer, counter offer, rejection, acceptance and so forth is out of date . . . The better way is to look at all the documents passing between the parties and glean from them or from the conduct of the parties, whether they have reached agreement on all material points. [2] 

In addition to this is the classical approach. In the case of G Percy Trentham Ltd v Archital Luxfer [3] despite LJ Steyn’s decision, the judge of first instance was able to find for a contract on the basis of offer and acceptance. So while one must bear in mind Lord Denning’s approach, the classical approach has been considered to be far more important. And so, the constituent parts of an agreement can be summed up in terms of offer and acceptance.

An offer is a definite statement of terms which is capable of acceptance. The person making it (the offeror) is willing to contract on the terms stated, as soon as these are accepted by the person who the statement is addressed (the offeree). [4] In terms of the types of offers that can be made, there are typically 2 main types. These are known as bilateral contracts and unilateral offers.

A unilateral offer occurs when one party makes an offer, with clear terms and an intention that it should be legally binding. The offeror, promises to pay for the act of another (thus a conditional promise) whereby the acceptance of that offer takes place when the offeree carries out the act in question. [5] An example of this derives from the case of Carlill v Carbolic Smoke Ball Co [6] Here it was argued that it was not possible to make an offer to the world at large, although this defence was rejected and the fact that offers may arise in two forms (either bilateral or unilateral) was exposed.

A bilateral contract consists of an agreement between two people, where one party promises to do something in return for a promise made by the offeree. It is made to a specific individual or group and both parties exchange promises to each other to undertake to do something in the future. In relation to the scenario, Kelly has directly contacted Hamilton who makes clear to her the terms of his offer and the discount he was prepared to give. He clearly made a promise on his side, provided that Kelly paid the discounted price thus this outlines a bilateral contract being formed.

Furthermore, there may be other circumstances where it may be apparent that an offer has been made but in actual fact this is not the case. They contemplate of further negotiations taking place before any formation of a contract. These types of circumstances are distinguished from offers, and the difference is that an offer demonstrates an intention by the person making the statement to be legally bound (that is if the terms of the statement are accepted by the other party). Other circumstances tend to be more if a negotiation with no real legally bound intention. [7] These other circumstances are invitations to treat which can be a mere supply of information, advertisements, display of goods for sale, rewards, auction sales, and tenders.

An invitation to treat is an invitation made to another individual to make an offer to contract. It is not an offer due to being a simple declaration of enthusiasm to enter into negotiations. [8] No negotiation is present in this scenario which implies a clear legal intention and so enforces the fact that a clear offer has been made. Even though it was Kelly who directly contacted Hamilton, it is under his terms by which she is bound and must act upon to create a contractual agreement.

When a person does actually make an offer, it is vital for it to be communicated to the offeree. In the case of Taylor v Laird [9] it was established that it would be unfair for a party to be bound by an offer of which he had no knowledge. Also, the party accepting the offer must have the offer in mind at the time of acceptance as a result of R v Clarke. [10] 

A person may change their mind towards a contract and so they may wish to reject an offer. This must be done in a specific way, as rejections are not at all successful until they are communicated to the offeror. In doing this, the offer can be terminated and the offeree cannot later accept it. There are also many ways that an offer may be revoked. Firstly, the passage of time can terminate an offer but if the offer is expressed to last only for a set period, then it will terminate upon the expiration of this period. [11] In terms of the scenario, Hamilton has clearly informed Kelly that the discounted price of £5000 was only guaranteed until the following Thursday. And having opened her email after this day, he is right in concluding that Kelly has not informed him in time to receive the 50% discount. If there is no time limit expressed, then after a reasonable amount of time has passed, the offer will automatically terminate, as recognized by the case of Ramsgate Victoria Hotel Co v Montefiore. [12] 

In addition to this, an offer can be revoked at any time prior to acceptance, provided that it has been communicated to the offeree as from the case of Byrne & Co v Leon Van Tienhovan & Co. [13] This communication can also be done through a reliable third party. In Dickinson v Dodds [14] the offer had been revoked through D’s conduct in selling to another. And that revocation was communicated through a reliable third party (C’s agent). Relating back to the scenario, Kelly telephoned PCTech Ltd and left a message with Hamilton’s secretary withdrawing her order. From her point of view, this was a reliable third party and she would have expected this message to get through to Hamilton straight away.

If there is a counter offer, then the original offer is automatically rejected. And once an offer is rejected it cannot be resurrected (as established by the case of Hyde V Wrench [15] ). Moreover, a request for information or asking questions does not constitute an offer. And seeking clarification of the terms is a genuine enquiry and does not amount to a counter offer. This is illustrated in the case of Stevenson, Jacques & Co v Mclean [16] where only a request for information was made. By ringing both PCTech Ltd and IT Linguist Ltd, Kelly has merely expressed the need for information in order to decide which offer to accept

In relation to acceptance, Professor Guenter Heinz Treitel stated that an acceptance is “…a final unqualified expression of assent to all the terms of an offer." [17] To all the terms of an offer, acceptance is the unconditional assent. There are two main principles which are of great importance. First of all acceptance must be unequivocal and unconditional. Secondly, the acceptance must be communicated to the offeror. When these both take place, then acceptance will be completed.

The general rule regarding communication of acceptance is that it must be communicated to the offeror. In the case of Brinkibon Ltd v Stahag Stahl und Stahlwaregesellschaft mbH [18] Lord Wilberforce stated:

The general rule, it is hardly necessary to state, is that a contract is formed when acceptance of an offer is communicated by the offeree to the offeror. [19] 

Communication must be done either orally, in writing or implied from conduct (although acceptance cannot be communicated by an identical cross offer). When it comes to an implication through conduct, difficulties tend to arise. In the case of Brogden v Metropolitan Railway Co [20] it was held for Metropolitan Railway Co that the offer was to supply coal under the contract terms of the new contract. And acceptance was implied by the conduct of the parties. But in this scenario, Kelly wrote and sent an email to Hamilton. This type of communication, as well as an oral communication tends to present little difficulty to carry out.

Furthermore, Lord Denning in the case of Entores v Miles Far East Corporation [21] illustrated the principle that acceptance has not to be simply communicated, but to also be received by the offeror. He also explained this by further stating that an offeror cannot deny receipt of the acceptance if ‘it is his own fault that he did not get it’, for example, ‘if the listener on the telephone does not catch the words of acceptance but nevertheless does not . . . ask for them to be repeated’. [22] This can be applied to the scenario because PCTech Ltd had no internet access from Wednesday till Friday morning due to repair of the water mains breaking all email and internet communications. And surely Hamilton would have been aware of this, and when he opened the email from Kelly he should have taken this into account.

Besides this, normally a party cannot accept a contract by remaining silent. This is not really the case for most unilateral offers, but does tend to be for bilateral contracts (as in this scenario). In the case of Felthouse v Bindley [23] no contract existed as the nephew failed to communicate his acceptance to his uncle. Thus silence does not constitute acceptance and the offeror cannot impose silence as a means of acceptance. So back to the scenario, as Kelly did not receive a reply to her email, she was right to think that no contractual agreement had actually taken place. Though before this could even happen, she withdrew her order by leaving a message with Hamilton’s secretary whom she trusted would pass the message on. So it may be right to say that no contractual agreement actually existed in the first place, as Kelly withdrew before any acceptance took place.

In addition to the rule that acceptance must be communicated to the offeror, there are also some exceptions. This rule can be overturned because if the offeree accepts by post, the general rule here is that acceptance takes place as soon as the letter is validly posted, not when it reaches the offeror. This is acknowledged as the ‘postal rule’. [24] One of the earliest cases in this area was the case of Adams v Lindsell [25] where a contract was formed when the acceptance was posted, so the defendant was in breach of contract to the claimant. The main principle for the postal rule derives from the case of Brinkibon Ltd v Stahag Stahl und Stahlwaregesellschaft GmbH [26] whereby valid posting is when the letter is placed into a post box or handed to a person authorized to receive or collect letters.

These postal rules can also be excluded, and in the case of Household Fire Insurance Co. v Grant [27] Bramwell LJ stated that the postal rules can be excluded by saying, ‘Your answer by post is only to bind me if it reaches me.’ [28] But the main question in relation to this scenario is whether the postal rules apply to emails. The answer is actually no; however there has been an academic debate that they do. But under common law emails actually require to be communicated and opened. So taking this into account, Kelly has not sent her acceptance in time to receive the discount Hamilton proposed.

On the other hand, there are also instantaneous forms of communication which do not apply to the postal rules. And in the case of Brinkibon Ltd v Stahag Stahl und Stahlwaregesellschaft GmbH [29] Lord Wilberforce stated that:

Since 1955, the use of Telex communication has been greatly expanded, and there are many variants on it . . . There may be some error or default at the recipient’s end which prevents receipt at the time contemplated and believed in by the sender. . . No universal rule can cover all such cases; they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgement where the risks should lie.

So even though Kelly’s email was not in time, her intention was for it to reach Hamilton before Thursday in order to obtain the discount he offered. Also, from the case of The Brimnes [30] the Court of Appeal held that a notice of withdrawal had been sent during office hours, but not seen by the office staff until the next Monday, was effective when received. Negligence on part of the office staff influenced the decision here. Therefore, the fact that in this scenario Hamilton’s secretary did not pass the message of withdrawal to Hamilton would not put Kelly at fault. In The Brimnes it was the fault of the office staff that the message was not read until the next day, and the fault therefore rested with the defendant. Thus even though Kelly accepted the offer which was not actually received until after the deadline specified, she did withdraw it before this and it was down to Hamilton’s secretary to get this across to him. And so, Hamilton should not be able to process the order for the full £10,000.